Colombia - Overview of economy

Colombia is a market economy with major commercial and investment links
to the United States, and more recently to its neighbor countries in the
Andean region. For close to a century the country was known as a
"coffee economy." As the twentieth century came to close,
Colombia remained a major coffee producer, though coffee was second to
oil as a generator of foreign exchange earnings. By the end of the
century, even chemicals had surpassed coffee in export earnings. In the
last 25 years the country has also gained an unfortunate reputation as a
haven for illegal drug cultivation and manufacture.

Colombia has attained greater diversification both in terms of
production and exports, allowing the country to cushion the external
shocks typically felt by less developed countries which are dependent on
shifting world prices for their major exports. Apart from oil
production, recent examples of success range from the export of
fresh-cut flowers to the chemical industry, a leading exporter to other
Latin American countries.

The net result has been an economy growing steadily—though
moderately—over the last 50 to 60 years, with an important
positive impact upon the welfare of the population measured by almost
any indicator. Life expectancy, nutrition, and access to health and
education have all improved. Major services such as electricity, urban
sewage, roads, and telecommunications have increased substantially.
Furthermore,
GDP per capita
has risen, although it is still unevenly distributed.

To continue this process, Colombia has required many technology inputs,
both in terms of equipment, chemical products, and raw materials for
production, as well as consumer products to match the needs of a
sophisticated urban society. Colombia's growth has been close to
the average of developing countries, but this growth has not been
steady. Annual GDP growth in the 45 years after World War II was about
4.8 percent, but it varied from a high of 6.08 percent between 1967 and
1972 to a more modest 2 percent between 1990 and 1997. In 1999 GDP
diminished by about 5 percent, the only negative result in close to 70
years as investment activity and demand plummeted.

Topographical conditions have made internal communications very
difficult, isolating most regions from one another. For close to a
century such difficulties prevented the consolidation of an integrated
national market. Today, modern transportation
infrastructure
is still lacking, both for the internal market and for exports.

Unlike most other Latin American countries, Colombia was never very cut
off from the world in economic terms. During the second half of the
twentieth century, the country managed a mixture of relatively open and
moderate economic strategies combined with industrial and export
promotion policies. One good example is currency management. Up to 1967
the currency had several values through multiple
exchange rates
. The government then chose to have one rate, with its value fluctuating
over time using a
crawling peg
mechanism. In addition, several other mechanisms were designed to
promote exports. Following such changes, exports expanded, bring in new
sources of foreign exchange.

Such policies—unusual in the region—allowed Colombia to
avoid the hardship of the 1980s, known throughout the area as the
"lost decade." One major difference was the
national debt
. During the 1980s Colombia managed to avoid the "debt
trap" with a debt of roughly 7 percent of GDP, although in the
last 7 years it increased to 30 percent. The country's total
external debt
by 1998 was US$35 billion. So when the times were ripe for major
changes, Colombia was able to launch economic reforms without the
strains suffered by other countries. The first 5 years of
liberalization
in the late 1980s and early 1990s were characterized by higher economic
growth than the previous decade (between 4 to 5 percent annually).
Subsequently, the GDP growth rate fell to 0.6 percent in 1998, and close
to-5.0 percent in 1999 during the
recession
which affected all of Latin America.

Despite its comparative advantages, Colombia has suffered from the
introduction and expansion of a powerful illegal drug industry that
today stands as a major threat to the consolidation of the country as a
democratic society and operates as a major fuel to social and political
violence. Originating in the early 1970s, the narcotics business managed
to profit from weak social and legal controls, political corruption, and
the collusion of some authorities. With their headquarters established
in the regions of Antioquia and Cauca, the Medellín and Cali
cartels set up a vast international network of coca, marijuana, and
poppy cultivation, the manufacture of cocaine and heroine, distribution
channels, and
money laundering
.